2015 Intergenerational Report: Chapter 1 - How will ... · Men 16.9 18.2 19.3 20.4 21.3 Women 19.3 20.4 21.4 22.3 23.1 Note: Cohort life expectancy at a given age takes into account

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Chapter 1: How will Australia change over

the next 40 years?

Key facts

The number of Australians aged 65 and over is projected to more than double by

2054-55, with 1 in 1,000 people projected to be aged over 100. In 1975, this was 1 in

10,000.

Australians will live longer and continue to have one of the longest life expectancies

in the world. In 2054-55, life expectancy at birth is projected to be 95.1 years for men

and 96.6 years for women, compared with 91.5 and 93.6 years today.

The average annual rate of growth in the population is projected to be 1.3 per cent,

compared with 1.4 per cent over the past 40 years.

By 2054-55, the participation rate for people aged over 15 years is projected to fall to

62.4 per cent, compared to 64.6 per cent in 2014-15.

The number of people aged 15 to 64 for every person aged 65 and over has fallen

from 7.3 people in 1975 to an estimated 4.5 people today. By 2054-55, this is

projected to nearly halve again to 2.7 people.

Female employment is projected to continue to increase, following on from strong

growth over the past 40 years. In 1974-75, only 46 per cent of women aged 15 to 64

had a job. Today around 66 per cent of women aged 15 to 64 are employed. By

2054-55, this is projected to increase to around 70 per cent.

During the 1990s, Australia’s productivity grew at an estimated average rate of

2.2 per cent per year. Today, Australians produce twice as many goods and services

for each hour worked as they did in the early 1970s.

The economy and incomes are projected to continue to grow, but at a slightly slower

rate than over the past 40 years.

This chapter explains the long-term demographic projections underpinning the analysis

in this report. It also outlines the long-term projections for key drivers of the economy:

population, participation and productivity, and illustrates how projected changes would

impact on our economy.

2015 Intergenerational Report

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Economic growth is the increase in the quantity of goods and services a country

produces (often referred to as Gross Domestic Product or GDP). Three main factors

determine the quantity of goods and services that a country produces: population,

participation and productivity.

While other variables, including natural disasters such as cyclones, can influence a

country’s GDP in the short term, intergenerational reports have used changes to

population, participation and productivity to help explain the impact of government

policies on GDP over 40 year timeframes. Chart 1.1 provides a framework for this

analysis.

In the context of economic growth, the key component of population is considered to

be the number of people over the age of 15 who may be available to work.

Participation is made up of three elements: how many people choose to seek work (the

workforce participation rate), how many of them can get jobs when they do seek work

(the unemployment rate) and the average number of hours worked by individuals who

have jobs. Improvements in participation happen as more people choose to look for

work, and more of them are able to find work.

Productivity is a measure of how much is produced, on average, for every hour that is

worked. Over the long-term, technological developments are a key contributor to

improvements in efficiency, as people and businesses find better ways to do their

work. For example, the adoption of information and communications technologies in

the 1990s helped workers undertake existing tasks more quickly and cheaply by

enabling more efficient products, processes and organisational structures.

When combined, projections for population and participation give the number of hours

worked in the economy. Combining this figure with productivity gives the total quantity

of goods and services produced in the economy.

The future size and structure of the Australian economy are key determinants of the

living standards of all Australians. These factors will have a strong influence over

governments’ ability to continue to afford to provide services and deliver community

support into the future.

Chapter 1: How will Australia change over the next 40 years?

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Chart 1.1 Population, participation and productivity

Source: Treasury.

1.1 Demography

1.1.1 Population projections

Australia’s population over the next 40 years is, to a large extent, determined by the

current population. Most of the likely future population is already living in Australia

today. But the actual course that the Australian population takes will also depend on

the particular interplay of future patterns and trends in fertility, mortality and migration.

Each of these factors will have implications for both the size and the age structure of

the population. Births clearly add to the younger cohorts of the population, deaths are

concentrated in the older cohorts, and migrants tend to be concentrated in younger to

middle age ranges.

Australia’s population is projected to grow and change over the next 40 years.

A growing population means greater demand for goods and services from businesses,

and also more people available to work in businesses to produce those goods and

services. The changing population means that the types of goods and services being

consumed will be different, on average, from what they are today.

Under the central projection covered in this report, the average annual rate of growth in

the population is 1.3 per cent, slightly slower than the annual average population

growth rate of 1.4 per cent over the past 40 years. This growth rate would see

Australia’s population rise to 39.7 million by 2054-55. However, population projections

are particularly sensitive to assumptions about the rate of net overseas migration.

Australia’s permanent migration intake is determined by government policy and is


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subject to review each year as part of the Budget process to reflect evolving economic

and social circumstances, as discussed further below.

1.1.2 Factors that influence population projections

Fertility

In 2013 the total fertility rate was 1.9 births per woman. This report assumes that the

total fertility rate remains at 1.9 over the next 40 years, which is consistent with the

observed trend in fertility over the past 35 years.

While the total fertility rate has remained steady since the late 1970s (Chart 1.2), a

larger proportion of women are having their first child in their late 20s and early 30s,

which is later than previous generations. This trend has been evident since the 1990s,

and influences the structure of the population. This led to a lower total fertility rate in

the 1990s, followed by a temporary period of higher fertility in the mid-2000s.

Over a period in the 2000s there was a short-term increase in fertility rates, with a

particularly high number of births to women aged 30 to 39 years. The causes of this

upswing in fertility are widely debated. A range of reasons has been put forward in this

debate including favourable economic conditions, more flexible working arrangements,

and increased levels of government support, including the baby bonus and Family Tax

Benefit. Changing social expectations around parenting, particularly supporting the role

of fathers may also have been influential. Finally, delayed fertility in a large cohort of

women may have led to higher fertility rates in the short term.

Chart 1.2 Australia’s historical and projected total fertility rate

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1921 1941 1961 1981 2001 2021 2041

Total fertility rateTotal fertility rate

Assumption

Note: The total fertility rate is the number of children a woman would bear during her lifetime if she experienced the current age-specific fertility rates at each age of her reproductive life. Source: ABS cat. no. 3105.0.65.001, 3301.0 and Treasury projections.


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Mortality and life expectancy

This report assumes continuing overall decline in mortality rates and improvement in

life expectancies. Life expectancy at birth is projected to increase from 91.5 years in

2015 to 95.1 years in 2055 for males, and from 93.6 years in 2015 to 96.6 years for

females (Table 1.1).

Table 1.1 Australian’s projected life expectancy (years) 2015 2025 2035 2045 2055

Life expectancy at birth

Men 91.5 92.6 93.6 94.4 95.1

Women 93.6 94.5 95.3 96.0 96.6

Further life expectancy at age 60

Men 26.4 27.9 29.3 30.5 31.5

Women 29.1 30.3 31.5 32.4 33.3

Further life expectancy at age 70

Men 16.9 18.2 19.3 20.4 21.3

Women 19.3 20.4 21.4 22.3 23.1 Note: Cohort life expectancy at a given age takes into account known or projected changes in mortality over the remainder of the person’s lifetime. Source: Treasury projections.

There are two methods of measuring life expectancy: the ‘period’ method and the

‘cohort’ method.

The period life expectancy method measures life expectancy as the average age to

which a person is likely to live given the mortality rates prevailing in that year. This

method of measuring life expectancy does not take into account the advances in life

expectancy that could reasonably be assumed during a person’s lifetime.

Previous reports have used the period method to report life expectancy. In this report,

life expectancy is reported using the cohort method unless otherwise indicated. The

cohort life expectancy method takes into account assumptions of improvements in

mortality rates over people’s lifetimes, and therefore takes a better account of

increasing life expectancy trends over time. These projections assume ongoing

changes in lifestyles and advances in medicine and technology will continue to improve

life expectancy in the future. By capturing these effects, the cohort life expectancy

measure provides a more realistic estimate. Further discussion of this method is at

Appendix C.

Australian life expectancies have risen over the past few decades (Chart 1.3) as a

result of improvements in health, education, and public safety. For example,

improvements in road safety such as seat belt laws and random breath testing during

the 1970s contributed to increased life expectancy following their introduction.

Significant health developments have also been influential, for example, widespread

availability of heart by-pass surgery and reduction in smoking prevalence. These

influences are further discussed in Box 1.1.


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There is a notable difference between life expectancies at birth for Indigenous

Australians and the Australian community more broadly. Based on data from 2010 to

2012, Indigenous life expectancy was estimated to be 69.1 years for males and

73.7 years for females (period method). A major policy objective for the Council of

Australian Governments is to close the gap between Indigenous and non-Indigenous

life expectancy within a generation, that is, by 2031.

Chart 1.3 Male and female life expectancy, 1905 to 2055

50

55

60

65

70

75

80

85

90

95

100

50

55

60

65

70

75

80

85

90

95

100

1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 2015 2025 2035 2045 2055

YearYear

Note: these figures are period life expectancies. Source: ABS cat. no. 3105.0.65.001 and Treasury projections.

Life expectancies at birth in Australia for both males and females remain among the

highest in the world. According to UN data for the period 2010-15, Australia ranks

equal first with Iceland in male life expectancy. For females, Australia ranks only

behind Japan, Spain, France and Italy.


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Box 1.1: Life expectancy improvements

This report assumes that life expectancy continues to improve over the projection

period, reflecting recent trends.

The projections, however, cannot take into account all of the improvements in life

expectancy that might happen over the next 40 years.

A projection of life expectancy for 2015 made in 1975 would not necessarily have

fully taken into account the significant changes that have contributed to the life

expectancy improvement of the past 40 years. For instance, since the 1970s we

have seen dramatic improvements in health care for older people. In 1975, a 65 year

old could expect to live another 13 years on average, while in 2015 this has

improved to 19 years, thanks to better cardiac care and many other improvements in

health care.

Similar breakthroughs could well be possible in the next 40 years. Medical research

underway today in areas such as stem cell therapy, new medicines and other

biotechnology has the potential to provide further dramatic improvements in life

expectancy. It is for this reason that some experts have suggested that life

expectancy may reach in excess of 140 years. The projections assume that the

improvements from medical research continue at the same rate as the past.

There is also considerable scope for particular improvements in life expectancy in

some specific age groups. Despite improved medical technology, life expectancy for

people aged over 80 has changed by much less over the past century than for

younger age groups. As there is a growing population in this age group it is expected

to become an increased focus for medical research over the next 40 years.

According to the Australian Institute of Health and Welfare there have also been

substantial ongoing increases in the length of time for which Australian men and

women can expect, on average, to live without disability — so-called healthy life

expectancy (Box 1.2).


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Box 1.2: Healthy life expectancy

Australians are living longer, and importantly the increases in life expectancy are

matched by increases in healthy life expectancy.

To measure this, the Australian Institute of Health and Welfare (AIHW) has

estimated ‘health expectancies’ for Australians. A male born in 2012 could expect to

live 79.9 years (period method) and an average of 62.4 of those years without

disability. A female could expect to live 84.3 years, and an average of 64.5 of those

years without disability. Of the years spent living with disability, an estimated 11.8

were without severe or profound core activity limitation for men, and 12.0 for women;

that is, not needing help with activities of self-care, mobility or communication.

Recent improvements in life expectancy have been met or exceeded by

improvements in these health expectancies. That is, not only are Australians’ lives

getting longer, they are enjoying good health for an increasing number of those extra

years. Between 1998 and 2012, the AIHW has estimated that life expectancy at birth

for males has increased by 4 years, while the number of years without disability

increased by 4.4 years — that is, all of the additional life expectancy was in years

without disability. For women, this was an increase of 2.8 years of life expectancy,

with 2.4 in years without disability. For Australians at age 65, more of their increase

in life expectancy has been for years without any severe disability.

The World Health Organisation publishes estimates of ‘healthy life expectancy’ at

birth. This measures the average number of years that a person can expect to live in

‘full health’ by taking into account years lived in less than full health due to disease

and/or injury. By this measure, in 2012 Australians had the equal fourth highest

healthy life expectancy at birth in the world (73 years for both sexes combined),

along with Spain, South Korea, Switzerland, Italy and San Marino.

Source: Australian Institute of Health and Welfare Bulletin 126, Healthy Life Expectancy in Australia: Patterns and Trends 1998 to 2012; World Health Organisation, Healthy Life Expectancy at Birth.


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Box 1.3: Australia’s demography — an international perspective

Australia’s current total fertility rate of 1.9 births per woman is below the replacement

level.1 Still, Australia’s fertility rate is well above many European countries and

countries in Australia’s region such as China and Japan, although below that of

New Zealand and the United States.

Table 1.2 International comparison of Australia’s demographic

indicators Annual

Total Total average

fertility Population dependancy population

rate Median age 65+ ratio (a) Population growth

2005-10 (years) (per cent) (per cent) (millions) (per cent)

Children per 2005 to

woman 2010 2010 2010 2010 2010

Australia 1.9 36.8 13.4 48 22.4 1.80.0

Canada 1.6 39.7 14.2 44 34.1 1.1

China 1.6 34.6 8.4 36 1,359.8 0.6

France 2.0 40.0 16.8 54 63.2 0.6

Germany 1.4 44.3 20.8 52 83.0 -0.2

Greece 1.5 41.8 19.0 50 11.1 0.1

Hungary 1.3 39.9 16.7 46 10.0 -0.2

India 2.7 25.5 5.1 54 1,205.6 1.4

Indonesia 2.5 26.9 5.0 53 240.7 1.4

Italy 1.4 43.3 20.3 52 60.5 0.6

Japan 1.3 44.9 23.0 57 127.4 0.1

Netherlands 1.7 40.8 15.4 49 16.6 0.4

New Zealand 2.1 36.6 13.0 50 4.4 1.1

Poland 1.3 38.0 13.5 40 38.2 0.0

Spain 1.4 40.2 17.1 47 46.2 1.3

Sweden 1.9 40.7 18.2 53 9.4 0.8

United Kingdom 1.9 39.8 16.6 52 62.1 0.6

United States 2.1 37.1 13.1 49 312.2 0.90.0 0.0 0.0 0 0.0 0.0

WORLD 2.5 28.5 7.7 52 6,916.2 1.20 (a) Total dependency ratio is the ratio of population aged 0-14 and 65+ per 100 population aged 15-64. Source: United Nations, Population Division, 2012 Revision.

1 The replacement rate is the level of fertility where each woman gives birth to enough children to sustain the population at its current level. It is around 2.1 for Australia and other developed countries.


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Australia’s population, although ageing, is neither as aged nor ageing as fast as

some other countries. Japan’s median age is almost 45 years and many European

countries have a median age in the forties. By contrast Australia’s median age is

36.8. The proportion of the Australian population aged 65 years and over is smaller

than many OECD countries, including Canada, France, Germany, Italy, Japan and

the United Kingdom. On the other hand Australia has a much larger proportion of its

population aged 65 years and above than China, India and Indonesia.

Japan and a number of European countries have experienced either very low

population growth (for example Greece and Poland) or negative population growth

(for example Germany and Hungary). This has been the result of a combination of

low fertility rates and very low migration. According to the UN population projections,

Japan’s population is projected to decline to 105 million by 2055, and then to

84.5 million by 2100.

Migration

Net overseas migration is the net gain or loss of population through immigration to

Australia and emigration from Australia. For the central scenario presented in this

report, net overseas migration is assumed to be 215,000 per annum from 2018-19,

consistent with the assumption used in the 2014-15 Mid-Year Economic and Fiscal

Outlook (MYEFO).

Net overseas migration has varied substantially over recent decades. During the

decade to 2005, it averaged around 105,000 per annum. Over the period since 2005,

net overseas migration was much more rapid, averaging around 220,000 per annum,

and reaching a peak of 300,000 in 2008-09.

Consistent with this, there has been significant variation in the levels of net overseas

migration underpinning population projections across the series of intergenerational

reports. In the 2002 report, the long-term net overseas migration assumption was

90,000 persons per annum. In the 2007 report, the assumption was 110,000 persons

per annum, and in the 2010 report, the assumption was 180,000 persons per annum.

Variation in net migration outcomes reflects changes in both out-migration, influenced

by economic circumstances domestically and overseas, and in government policy

regarding immigration into Australia. Australia’s permanent migration intake is

determined by government policy (including the mix between skilled and family reunion

places) and is subject to review each year as part of the Budget process to reflect

evolving economic and social circumstances.

As such, actual population outcomes over coming decades will depend upon the future

immigration policy settings of successive governments, as well as Australia’s relative

economic performance. By way of illustration, if net overseas migration were instead to


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average 180,000 per annum over coming decades, the projected population in

2054-55 would be 37.9 million, while an average net overseas migration of

140,000 per annum would see a projected population of 35.7 million in 40 years’ time.

Lower levels of net overseas migration would lead to lower population growth rates

over time and, therefore, lower economic growth.

Historically, immigration has been an important source of labour supply for Australia.

Since at least the 1980s, immigration has made the largest contribution to growth in

Australia’s working age population (aged 15 years and over).

As permanent migration has increased since the mid-1990s greater emphasis has

been placed on skilled migration and the choice of skills has been made largely

demand-driven by employers, supporting economic growth.

Migration also has an impact on the age distribution of the population. Migrants, on

average, are younger than the resident population. Migration reduces the average age

of the population and slows the rate of population ageing. This increases the proportion

of the population that are of working age and raises aggregate workforce participation,

increasing economic growth. This trend has been relatively stable over time.

In 2013-14, around 88 per cent of migrants were aged under 40 years (Chart 1.4). In

comparison, at 30 June 2014, around 54 per cent of the resident Australian population

was aged under 40. Around 54 per cent of migrants were aged from 15 to 29 years.

The share of the resident Australian population aged from 15 to 29 years at 30 June

2014 was 21 per cent.

Chart 1.4 Age distribution of Australia’s population and migrants

0

5

10

15

20

25

0

5

10

15

20

25

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65and

over

Per centPer cent

Net Overseas Migration 2013-14 Australian Population June 2014

Source: ABS cat. no. 3101.0 and 3412.0.


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Under the central scenario, net overseas migration is projected to fall as a percentage

of the resident population over the next 40 years, to just over 0.5 per cent per annum,

which would bring it back in line with the average of 0.5 per cent observed between

1973 and 2006 (Chart 1.5).

Chart 1.5 Net overseas migration as a percentage of the population

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-0.5

0.0

0.5

1.0

1.5

2.0

2.5Per centPer cent

Average: post w ar

period 1.0

per cent per annum (1949-1972)

Average:

0.5 per cent per

annum (1973-2006)

Average: recent period to end of

forward estimates ~1.1 per cent per annum (2007-2018)

Projections

1.1.3 Population structure

Consistent with previous reports, the structure of Australia’s population is projected to

change significantly over the next 40 years. By mid-century, a greater proportion of the

population will be aged 65 and over and a significantly smaller proportion of the

population will be of traditional working age, that is, 15 to 64 years (Table 1.3).

Table 1.3 Population projections (millions of persons at 30 June) Age range 1974-75 2014-15 2024-25 2034-35 2044-45 2054-55

0-14 3.8 4.5 5.3 5.9 6.3 6.9

15-64 8.9 15.8 17.8 19.9 22.1 23.8

65-84 1.1 3.1 4.3 5.2 5.9 7.0

85 and over 0.1 0.5 0.6 1.0 1.5 1.9

Total 13.9 23.9 28.0 32.0 35.8 39.7

Percentage of total population

0-14 27.5 18.8 19.0 18.3 17.6 17.5

15-64 63.8 66.2 63.6 62.1 61.6 60.0

65-84 8.1 13.0 15.2 16.3 16.6 17.7

85 and over 0.6 2.0 2.2 3.2 4.2 4.9 Source: ABS cat. no. 3105.0.65.001 and Treasury projections.


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By 2054-55, the number of people aged 65 to 84 will have increased substantially. By

2054-55 there are projected to be 7.0 million Australians aged 65 to 84, compared with

around 3.1 million in 2015. This would represent just under 18 per cent of the total

population, compared with 13 per cent in 2014-15. In 1974-75, around 1.2 million

persons were aged over 65, or around 9 per cent of the population.

Both the number and proportion of Australians aged 85 and over is projected to grow

rapidly (Chart 1.6). In 1974-75, this group represented less than 1 per cent of the

population — around 80,000 persons. In 2015, around 500,000 persons, or 2 per cent

of the population, are projected to be aged 85 and over. By 2054-55, this group is

projected to be around 2 million persons, or around 5 per cent of the population.

Chart 1.6 Proportion of population aged 65 and over

0

5

10

15

20

25

0

5

10

15

20

25

1974-75 2014-15 2054-55

Per centPer cent

65-84 85 and over

Source: ABS cat. no. 3105.0.65.001, 3101.0 and Treasury projections.

Finally, the projections suggest there will be around 40,000 centenarians in 2054-55

(Chart 1.7). This would be almost nine times the number expected in 2014-15, and well

over three hundred times the 120 or so centenarians alive in 1974-75.


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Chart 1.7 Number of centenarians

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1974-75 1984-85 1994-95 2004-05 2014-15 2024-25 2034-35 2044-45 2054-55

Projections


Charts 1.8 and 1.9 illustrate the changing structure of Australia’s population. In

particular, it shows how the percentage of the population aged in their younger years

will fall and the proportion of the population aged in their later years will increase

markedly.

Chart 1.8 Proportion of the Australian population in different age

groups in 2014-15 and 2054-55 as a percentage of the total population

Source: Treasury projections.


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Chart 1.9 Number of people aged from 15 to 64 relative to the number

of people aged 65 and over

2.7

3.0

3.2

3.7

4.5

6.1

7.3

0 1 2 3 4 5 6 7 8

0 1 2 3 4 5 6 7 8

2054-55

2044-45

2034-35

2024-25

2014-15

1989-90

1974-75


1.1.4 Uncertainty in population projections

Table 1.4 Sensitivity analysis of population projections — fertility and

life expectancy Central

case Low High Lower Higher

TFR 1.7 TFR 2.1 ABS

births per births per Medium ABS High

woman woman assumption assumption

Proportion of population aged 65 and over (per cent of population)

22.5 23.6 21.6 21.4 23.5

- 1.0 -1.0 -1.1 0.9

Median age of population (years)

40.4 42.2 38.6 39.7 40.9

Change from central case - 1.7 -1.8 -0.7 0.5

As at June 2055

As at June 2055

Change from central case

Fertility Life Expectancy

Note: Life expectancy sensitivity analysis based on medium and high mortality assumptions from ABS population projections (ABS cat. no. 3220.0). The ABS uses two mortality assumptions which it terms ‘high life expectancy’ and ‘medium life expectancy’. The ‘higher life expectancy’ case assumes continued improvement in life expectancy, while the ‘lower life expectancy’ case assumes declining improvement. The ABS uses the ‘medium’ assumption for its low population scenario. TFR = Total Fertility Rate. Sources: Treasury projections.

There is inevitable uncertainty around the assumptions used to produce these

projections. Several scenarios are presented to illustrate the effects that adopting

different assumptions would have on the projections. The results are presented in

Table 1.4 and show population projections for scenarios of low and high fertility, and

low and high life expectancy. The alternative projections show that the ageing of the


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population is a future that Australia cannot avoid given any reasonable set of

assumptions about future fertility, life expectancy and migration trends.

1.2 Participation

1.2.2 Participation and future economic growth

The number of people who are able and choose to seek work, how many of them can

get jobs when they do seek work and the average number of hours worked by

individuals who have jobs are important influences on growth in GDP. Over the next

40 years, the proportion of the population participating in the labour force is expected

to decline as a result of population ageing. This declining participation rate is projected

to detract slightly from real GDP growth per person over this period. Encouraging and

valuing greater workforce participation, in particular amongst older age groups,

presents an opportunity to further lift GDP growth per person.

Overall, participation for all people aged 15 years and over is projected to fall from

64.6 per cent in 2014-15 to 62.4 per cent in 2054-55 (Chart 1.10). This figure masks a

number of underlying trends in participation rates.

Chart 1.10 Historical and projected participation rates

50

55

60

65

70

75

80

50

55

60

65

70

75

80

1978-79 1993-94 2008-09 2023-24 2038-39 2053-54

Per centPer cent

Age 15-64

Age 15 and over

Source: ABS cat. no. 6291.0.55.001 and Treasury projections.

Labour force participation rates are affected by changes in the age distribution of the

population and changes in participation rates within each age group. Factors affecting

each age group’s participation in the labour force, such as educational attainment, also

play an important role in changes to overall participation rates.


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The changing age structure of the population will result in overall participation falling

(Table 1.5). This is because there will be fewer people in the age groups where

participation is highest (the ages from 15 to 64) and more people in the age groups

where participation begins to decline (people aged over 65).

However, participation rates for every male and female age cohort are expected to

continue to increase or stabilise. Chart 1.11 shows the participation rates for different

age groups and how they have increased from 1975 to 2015 and how they are

projected to increase to 2055. The most significant increases are expected for 60-64

and 65-69 year olds.2

Female employment is projected to continue to increase, following on from strong

growth over the past 40 years. In 1975, only 46 per cent of women aged 15 to 64 had a

job. Today around 66 per cent of women aged 15 to 64 are employed. By 2055, this is

projected to increase to around 70 per cent of women aged 15 to 64.

Based on current trends, female labour force participation rates for most age groups

are projected to continue to increase, but at a slower rate, and stabilise in the long run.

Chart 1.11 Participation rates in 1975, 2015 and 2055 by age group

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

15-19 20-24 25-34 35-44 45-54 55-59 60-64 65+

Per centPer cent

1974-75 2014-15 2054-55


2 A cohort method based on the methodology used by the Productivity Commission has been used to project the participation rates of older people. This changed modelling assumption has resulted in higher projected participation rates for older people than in previous reports.


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Table 1.5 Trend participation rates by age group 66.7

2014-15 2024-25 2034-35 2044-45 2054-55

15-24 66.6 66.7 66.6 66.9 66.9

25-54 82.3 83.7 84.2 84.5 84.7

15-64 76.2 78.2 78.8 79.1 79.315.9

15+ 64.6 64.9 64.0 63.4 62.4

65+ 12.9 15.9 16.9 16.7 17.3 Note: Appendix D contains further details of the participation rate projections by age and gender. Source: Treasury projections.

With the exception of those aged 15 to 19, the total age specific participation rates

(full-time and part-time employment combined) are higher for men than for women.

This is projected to continue. Of those aged 25 to 54, around 90 per cent of men,

compared to around 76 per cent of women, participated in the labour force in 2013-14.

Changes to the age at which people become eligible for the Age Pension have affected

the total participation rate. Between 1995 and 2013, the Age Pension eligibility age for

women was brought into line with that for men, rising from 60 to 65 years. From

July 2017 the eligibility age for the Age Pension will rise from 65 reaching 67 from

1 July 2023. The Government’s policy is to continue the increase in the Age Pension

age to reach 70 years by 1 July 2035.

The change in the Age Pension eligibility age from 65 to 70 years is estimated to add

around 0.8 percentage points to the total participation rate in 2054-55, bringing it to

62.4 per cent, compared with 61.6 per cent without the changes.

1.2.3 Trends in participation

The trend of overall declining participation, expected in decades to come, is in contrast

to the experience over the past 40 years. During this period there was a significant

increase in the proportion of people that participated in the labour force. This

contributed around 0.2 percentage points to annual economic growth over the period.


Page 19

Chart 1.12 Participation rates of people aged 65 years and over

0

2

4

6

8

10

12

14

16

18

20

0

2

4

6

8

10

12

14

16

18

20

1974-75 1984-85 1994-95 2004-05 2014-15 2024-25 2034-35 2044-45 2054-55

Per centPer cent


Previous years’ gains in participation rates were driven by increases in participation by

women and older people (Chart 1.12).

The increase in female participation rates resulted from increased levels of education,

changing social attitudes towards gender roles, declining fertility rates, better access to

childcare services and more flexible working arrangements.

Older people have been able to extend their labour force participation as a result of the

improvements that have led to longer life expectancy, the rise of less physically

demanding work and new technologies. Between 1978-79 and 2013-14, the

participation of people aged 55 to 64 increased from 45.6 per cent to 63.8 per cent.

Participation rates also increase as the level of net overseas migration increases

(Chart 1.13). Migrants tend to be younger, on average, than the resident population,

and therefore increase overall labour force participation rates. While there is some

evidence that migrants participate in the labour force more than the Australian average

for their age and gender, the projections have not taken this effect into account.


Page 20

Chart 1.13 Participation rates by net overseas migration assumptions

60

62

64

66

68

60

62

64

66

68

2007-08 2017-18 2027-28 2037-38 2047-48

Per centPer cent

215,000 180,000 250,000


In 2013, Australia’s participation rate for people aged 15 and over was fifth highest in

the OECD (Chart 1.14).

Chart 1.14 Participation rates of OECD countries 2013, people aged 15

and over

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

Icela

nd

Sw

itzerland

New

Zeala

nd

Canada

Aust

ralia

Norw

ay

Neth

erla

nds

Sw

eden

Isra

el

Denm

ark

Unite

d S

tate

s

Unite

d K

ingdom

Est

onia

Chile

Mexi

co

Aust

ria

South

Kore

aIr

eland

Port

uga

l

Germ

any

Fin

land

Cze

ch R

epublic

Slo

vak

Repub

lic

Japan

Spain

Slo

venia

Luxe

mbourg

Pola

nd

Fra

nce

Belg

ium

Gre

ece

Hungar

y

Tur

key

Italy

Per centPer cent

Source: World Bank.

The experience of Iceland, Switzerland, New Zealand, and Canada, all with higher

participation rates, demonstrates that further gains can be made, particularly in the

female participation rate. Australia’s female participation rate is around 4 percentage


Page 21

points lower than that in New Zealand and Canada (Chart 1.15). If Australia’s female

participation rate reached that of Canada, the Grattan Institute estimate that Australia’s

GDP would be a permanent $25 billion higher.

Chart 1.15 International comparison of participation rates, 2013

50

55

60

65

70

75

80

50

55

60

65

70

75

80

Male Female Total

Per centPer cent

Australia Canada New Zealand

Source: International Labour Organisation.

Participation rates in other countries reflect their specific circumstances, for example,

the interaction of the tax and transfer systems, availability of childcare, and policies on

parental leave. Nonetheless, policy settings that seek to remove barriers to

participation of females and older age groups in Australia and encourage them to work,

if they wish to do so, can drive gains in GDP and income growth.

These policy settings include availability of childcare, flexible working arrangements,

and removal of discrimination. Policies seeking to remove barriers or support

participation for other groups where this has been challenging, for example, young

unemployed people and people with disability, would also be expected to generate

gains in GDP and income growth.

1.2.4 Hours worked

In addition to the participation rate, the average number of hours worked also has a

significant impact on economic outcomes. Over the past three decades, the average

number of hours worked per week has decreased, due partly to an increase in the

number of people working part-time, reflecting the increase in female and older

workers, who particularly benefit from a flexible workplace environment.

The average number of hours worked is projected to fall slightly over the next 40 years.

Population ageing is expected to be the main driver of the decline in average hours

worked. Historically, those in older age groups have worked for fewer hours per week,


Page 22

on average, than those in younger age groups. This is expected to continue. Changes

in the Age Pension eligibility age are projected to have a minimal impact on the

average hours worked as the effects of a higher proportion of older workers on

part-time hours are taken into account (Chart 1.16).

Chart 1.16 Historical and projected average hours worked

0

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40

1996-97 2006-07 2016-17 2026-27 2036-37 2046-47

HourHour

Source: ABS cat. no. 6202.0 and Treasury projections.

1.2.5 Unemployment

Projections in this report use an assumption of a constant rate of unemployment of

around 5 per cent over the projection period.

While employment growth depends on the dynamics of the labour force and the wider

economy, the assumption of 5 per cent unemployment is based on estimates of the

Non-Accelerating Inflation Rate of Unemployment (NAIRU). The NAIRU is the lowest

sustained unemployment rate that does not cause inflation to increase.

The NAIRU varies over time, driven by a complex range of economic, demographic

and institutional factors, including the way inflation expectations are formed, the

wage-setting environment, labour mobility, and the education and skills of people in the

labour force. The NAIRU cannot be measured directly and is typically estimated using

economic models (Chart 1.17). There is a wide range of uncertainty around estimates

for the NAIRU, of the order of ½ to 1 percentage point.

Under the projections methodology, the unemployment rate returns to 5 per cent. This

does not imply that difficulties faced by certain cohorts of the labour force, such as

youth, will disappear. After falling to a record low of 7.6 per cent in August 2008, the

rate of youth unemployment sits at 14.2 per cent as of January 2015. Ensuring that


Page 23

more young people are able to find employment when they leave education and

training will be important to avoid entrenching disadvantage over the longer term.

As a result of the constant unemployment assumption, employment growth from

2020-21 onwards (where the economy is projected to return to full employment)

reflects growth in the labour force. Prior to 2025 the unemployment rate assumed is

consistent with the 2014-15 MYEFO economic forecasts and projections. Labour force

growth, and therefore employment growth, is projected to slow over the remainder of

the projection period, associated with a falling total participation rate and slower growth

in the working age population.

Chart 1.17 Estimated NAIRU

2

4

6

8

10

12

2

4

6

8

10

12

Jun-79 Dec-88 Jun-98 Dec-07 Jun-17 Dec-26 Jun-36 Dec-45 Jun-55

Per centPer cent

Unemployment rate NAIRU

Projection

Source: ABS cat. no. 6202.0 and Treasury projections

1.3 Productivity

1.3.1 Productivity and future economic growth

Australians have high living standards which have been boosted by rapid growth in

incomes over the past two decades. This increased wealth over the past 40 years has

increased incomes across the community. Average annual income growth increased

from 1.7 per cent in the 1980s to 2.2 per cent in the 1990s and to 2.3 per cent through

the 2000s to 2013. This has seen average income levels rise from around $40,500 (in

today’s dollars) in the early 1990s to around $66,400 today. Income is one of the most

important determinants of living standards. Increasing real incomes give people the

capacity to buy more goods and services, save and invest, as well as more freedom to

choose how to spend their time. Higher income generates more tax revenue for

government services and income support.


Page 24

Labour productivity is a measure of how much is produced, on average, for every hour

that is worked. On this measure, Australians today produce twice as many goods and

services per hour of work than they did in the early 1970s. Labour productivity can be

thought of as having two components: capital deepening, and multifactor productivity.

Capital deepening reflects the increases in the ration of capital to labour, and allows

more to be produced in each hour worked.

Multifactor productivity measures the efficiency with which the key inputs of labour and

capital are used to produce goods and services. Many factors can influence changes in

measured multifactor productivity, particularly over shorter periods of time, including

educational attainment, the extent and type of regulation, levels of competition and

other incentives for businesses to operate efficiently, business and economic cycles,

economies of scale, and weather patterns.

Productivity has consistently been the most significant driver of income growth. Growth

in productivity enables more or better goods and services to be produced with the

same, or fewer resources, which can result in higher profits and wages, and lower

prices for consumers.

The measure of productivity used throughout this report is labour productivity,

consistent with the framework for constructing projections of long-term real GDP based

on population, participation and productivity.

This report shows that, given the expected changes in the age structure of the

population and the projected gradual decline in the participation rate, productivity will

play an even more critical role as a driver of income growth into the future.

1.3.2 Productivity growth

Productivity growth over the next 40 years is assumed to be 1.5 per cent per annum in

the projections in this report. This is the same growth rate as the 30-year average

assumption used in the 2014-15 Budget and MYEFO. Labour productivity growth

averaged 1.3 per cent in the 1980s, increased to 2.2 per cent in the 1990s, and was

1.5 per cent in the 2000s (Chart 1.18).


Page 25

Chart 1.18 Labour productivity growth

-1

0

1

2

3

4

5

-1

0

1

2

3

4

5Per centPer cent

Average 1990s (2.2 per cent)



Source: ABS cat. no. 5206.0.

The increase in productivity growth rates seen in the 1990s is widely attributed to

significant policy reforms of that decade and the 1980s. These included removing

industry protections and opening up the economy to overseas trade, reducing controls

over labour, capital and product markets, reforms to improve the efficiency of markets

providing essential services, such as electricity, and taxation reforms. Reforms to

macroeconomic policy settings included letting market forces determine the exchange

rate, introducing the independent setting of interest rates and placing fiscal policy in a

medium-term framework.

These reforms created more competitive and productive markets, in which businesses

became more efficient and more innovative. The reforms also encouraged businesses

to adopt and exploit new and improved technologies developed overseas, including

those embedded in new capital, such as information and communications

technologies. The reforms engendered greater flexibility in the use of resources and

allowed relative prices of goods and services to reflect the balance of supply and

demand more accurately, improving overall resource allocation and returns on

investments in both physical and human capital. Continued exploitation of new

technologies and policy settings conducive to their adoption, will be vital to Australia’s

future productivity performance.

Since 1970, more Australians have been completing higher levels of education, which

has also contributed to growth. In 1970, a third of boys were undertaking their Year 12

High School Certificate or equivalent.3 By 2011, that stands at almost 75 per cent.

4 In

1970, 25 per cent of girls were undertaking their Year 12 High School Certificate or

equivalent. By 2011, that stands at over 80 per cent.

3 ABS cat. no. 4221.0. 4 ABS cat. no 4102.0.


Page 26

The slowdown in productivity growth between the 1990s and the 2000s has partly

reflected the very high investment activity in the resources and utilities sectors and the

slowing of growth internationally and in Australia since the Global Financial Crisis.

Productivity growth often slows during a significant investment phase as there are long

lead times before increased output is achieved. That is, in the early investment phase,

there will be a high level of capital input, but it will be associated with very little

increased output, leading to a fall in measured productivity.

Nonetheless, these factors do not explain fully the breadth and magnitude of the

slowdown in Australia’s productivity growth rates since the 1990s. This has been

observed in the majority of industries, suggesting that more fundamental factors are at

play. Part of the slowdown may reflect the fading impact of past reforms. There have

been fewer significant policy reforms since the early 2000s. Strong income growth, low

unemployment and high rates of profitability through the 2000s may have significantly

lowered the pressure on governments to undertake the necessary productivity

enhancing reforms and reduced the incentive for businesses to become more

competitive during this period.

There is also evidence that policy requirements have constrained how inputs are used

in some sectors and increased regulatory burdens, thereby detracting from measured

productivity growth. For example, some new environmental, water and electricity

service standards have required many utilities service providers to invest in higher cost

production technologies, which, while potentially enhancing the quality of service,

reduce measured productivity.

There is little evidence that slower productivity growth has been the result of

inadequate investment in skills, education and innovation more broadly. Australia has

not been alone among advanced economies in experiencing slower productivity growth

over the 2000s, which suggests that the rate of growth in technological advance —

which expands production possibilities — may have been slower than in previous

decades.

There is some evidence that high levels of net overseas migration might increase

productivity, as the skills focus of Australia’s migration program means that migrants

may, on average, be better educated than the average Australian. Migrants can also

be highly motivated, owing to their decision to move to Australia.


Page 27

1.4 Long-term economic projections

1.4.1 Economic projections

The projections for economic and income growth over the next 40 years have a

significant bearing on the fiscal projections. Economic growth is projected to slow over

the next 40 years (Chart 1.19). The average annual growth of real GDP is projected to

be 2.8 per cent over the next 40 years, compared to 3.1 per cent experienced over the

past 40 years. The average annual growth of real GDP per person is projected to be

1.5 per cent over the next 40 years, compared to 1.7 per cent over the past 40 years.

Chart 1.19 Average annual growth of real GDP and real GDP per

person

1.4

1.7

3.1

1.31.5

2.8

0

1

2

3

4

0

1

2

3

4

Population Real GDP per person Real GDP

Per centPer cent

Past 40 years Next 40 years Source: ABS cat. no. 5206.0 and Treasury projections.

Income growth is projected to slow over the next 40 years. Income is measured by real

gross national income (GNI). Real GNI is the value of goods and services produced by

Australians (either in Australia or overseas), adjusted for changes in purchasing power

due to changing trade prices. In other words, real GNI measures changes in what

Australians can buy with their income.

The average annual growth rate of real GNI per person is projected to be 1.4 per cent

over the next 40 years, compared to the 1.9 per cent experienced over the past

40 years. This would see real GNI per person increase from $66,400 in 2014-15 to

$117,300 in 2054-55. This increased wealth over the past 40 years has increased

incomes across the community.


Page 28

The long-term economic projections take current economic conditions and economic

forecasts as a base — these are the same parameters as those used in the

2014-15 MYEFO. Over the longer term, trend growth rates are used to develop

projections. Trend growth rates are a function of the factors that underpin economic

growth — population, participation and productivity.

To 2015, Australia has experienced a record 23 years of uninterrupted economic

growth. If history is any guide, the economy will continue to go through business cycles

or economic shocks over the next 40 years, which could have significant impacts on

growth. However, the outlook to 2054-55 will be driven not by these cycles, but by the

underlying trends in population, participation and productivity.

The prospect of business cycles or economic shocks over the next 40 years highlights

the importance of achieving fiscal sustainability and positioning Australia’s economy to

offset the effects of potential downturns. Further discussion is at Box 1.4.

It is also important to keep in mind that the long-term projections look through business

cycles and assume a smooth growth path through to 2054-55. The timing, length and

magnitude of potential economic downturns are very difficult to forecast. The economic

growth projections need to be understood as an average growth projection through to

2054-55, and not as a forecast of uninterrupted growth.

1.4.2 Economic growth and income projections

The contribution of population, participation and productivity to annual real GDP growth

per person is shown in Chart 1.20. Economic growth rates are expected to decline

gradually over the long run. This decline is expected to be caused by a slowing in

population growth and a decline in the trend workforce participation rate as a result of

population ageing.


Page 29

Chart 1.20 Population, productivity and participation combine to

produce GDP per person

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2014-15 2019-20 2024-25 2029-30 2034-35 2039-40 2044-45 2049-50 2054-55

Per centPer cent

Share of population 15+ Average hours worked Labour productivity

Participation rate Unemployment rate Real GDP per person Source: ABS cat. no. 5206.0, 3105.0.65.001, 6202.0 and Treasury projections.

Chart 1.21 identifies the drivers of GDP growth per person over the next 40 years.

Labour productivity is expected to be the main driver of real GDP growth, with a

smaller contribution coming from compositional changes in population. Falling overall

participation rates are expected to reduce GDP growth.

Over the past 40 years, population factors have contributed to per person economic

growth, with the growth in the working age share of the population lifting per person

growth by 0.3 percentage points per annum. The increase in the participation rate,

particularly the participation rate of women, lifted growth by 0.2 percentage points per

annum, but this was offset by an increase in the unemployment rate and falling

average hours worked. All together, the population and participation factors increased

economic growth by 0.2 percentage points per annum. Productivity growth was the

largest contributor to per person growth.

Over the next 40 years the increase in the working age share of the population will

increase by less than over the previous 40 years, but will still contribute slightly to

per person growth. The participation rate is expected to fall, mainly as a result of

ageing of the population. The unemployment rate and average hours worked are

expected to remain broadly constant, and hence not contribute or detract from growth.

Productivity growth is expected still to be the largest contributor to per person growth.


Page 30

Chart 1.21 Components of growth in real GDP per person

0.3 0.2

-0.1 -0.2

1.51.7

0.1

-0.1

0.0 0.0

1.5 1.5

-1

0

1

2

3

4

-1

0

1

2

3

4

Share ofpopulation 15+

Participationrate

Unemploymentrate

Average hoursworked

Labourproductivity

Real GDP perperson

Past 40 years Next 40 years

Percentage points Percentage points

Population Participation Productivity

Source: ABS cat. no. 5206.0, 6202.0 and Treasury projections.

Nominal GDP, prices and wages

Nominal GDP is the value of the economy’s output. Growth in nominal GDP reflects

growth in both the quantity and price of output. Projections of nominal GDP growth

therefore depend on assumptions regarding real GDP growth and growth in prices.

Nominal GDP is the primary determinant of taxation revenue.

Nominal GDP is projected to grow at an average of around 5¼ per cent a year over the

projection period, unchanged from the 2010 report (Chart 1.22).

Consistent with assumptions in the 2014-15 MYEFO, Australia’s terms of trade are

expected to return to the level observed in 2005-06 by 2019-20 and remain at that level

over the projection period.

Over the long-run, domestic prices are projected to grow by 2½ per cent a year,

consistent with the Reserve Bank of Australia’s medium-term inflation target. Wages

are projected to grow at around 4 per cent, consistent with domestic inflation and

productivity growth of 1.5 per cent.


Page 31

Chart 1.22 Nominal GDP growth projections

-5

0

5

10

15

20

-5

0

5

10

15

20

1974-75 1984-85 1994-95 2004-05 2014-15 2024-25 2034-35 2044-45 2054-55

Real GDP Prices Nominal GDP

Percentage points Percentage points

Forecasts / projections

Source: ABS cat. no. 5206 and Treasury projections.

Income growth

Income growth is likely to slow considerably over the next 40 years.

The average annual growth rate of real GNI per person is projected to be 1.4 per cent

over the next 40 years, which would see real GNI per person increase from $66,400 in

2014-15 to $117,300 in 2054-55. This compares to the average annual growth rate of

1.9 per cent of the past 40 years. This means that the projected change in the average

annual growth of real GNI per person over the projection period is likely to be greater

than the change in average annual growth in real GDP per person (Chart 1.23).


Page 32

Chart 1.23 Average annual growth rates for real GDP and GNI

projections

1.7

1.9

1.51.4

0

1

2

3

0

1

2

3

Real GDP per person Real GNI per person

Per centPer cent

Past 40 years Next 40 years Source: ABS cat no. 5206 and Treasury projections.

These projections take into account the decline in the terms of trade since their peak in

2011. As a result, the increase in average incomes projected over the period from

2014 to 2025 is expected to be slower than experienced over the past decade. Beyond

2024-25, it is assumed that the terms of trade no longer detract from growth, resulting

in a projected improvement in real GNI per person growth. The ageing of the

population slows GNI growth through its effect on workforce participation.

Growth in real GNI per person is driven by growth in labour productivity (how much is

produced for each hour worked), labour utilisation (how many hours an average person

works), net foreign income receivable from abroad and the terms of trade. Income

growth over the past five decades as well as projections for the medium and long term,

broken down by source, are shown in Chart 1.24.


Page 33

Chart 1.24 Sources of growth in real national income per person

-1

0

1

2

3

4

-1

0

1

2

3

4

1960s 1970s 1980s 1990s 2000 to 2013 2014 to 2025 2025 to 2055

Net foreign income Labour utilisation Labour productivity

Terms of trade Per person income growth

Percentage points contribution, annual average Percentage points contribution, annual average

Projections

Source: ABS cat. no. 5206.0 and Treasury projections.

Productivity growth has been the main driver of growth in real average incomes over

the past 50 years and is assumed to remain so in the future.

In the 1980s, growth in real GNI per person was supported by a significant contribution

from labour utilisation, reflecting an increase in the proportion of the population being

of working age and increases in workforce participation. The 1990s saw strong growth

in labour productivity, which offset a small negative impact of the terms of trade.

Over the past decade, and despite a broad-based slowdown in productivity growth,

income growth increased due to unprecedented growth in the terms of trade as a result

of the resources boom.

As has been widely analysed and discussed, over the next decade or so, the fall in the

terms of trade is projected to reduce growth in GNI, with growth for the majority of the

next 40 years driven by productivity growth.

1.4.3 Uncertainty in economic projections

The results presented in this report are one demonstration of many potential outcomes.

To demonstrate the effects of the uncertainty of the economic projections, alternate

projections based on different assumptions and parameters have also been prepared.

The results are presented in Table 1.6 and show real GDP and real GNI per person

projections under high and low productivity and participation assumptions.


Page 34

Table 1.6 Sensitivity analysis of economic projections Central High Low High Low

case productivity productivity participation participation

1.6 1.4 1.5 per cent 1.5 per cent

higher lower

3.7 -3.7 1.5 -1.5

$117,300 $121,900 $113,000 $119,200 $115,500

$4,500 -$4,300 $1,800 -$1,800

As at 2055

Change from central scenario

central scenario (per cent)

Projected real GNI per capita

Changed assumption

Projected real GDP level

Change from

Source: Treasury projections.

The sensitivity analysis in Appendix B provides more results for reasonable alternative

assumptions to the central case presented in this report.

Box 1.4: What happens if there is an economic shock?

Long-term economic projections present one possible outcome based on a set of

well-informed projections and assumptions about future changes in Australia’s

population, workforce participation and productivity.

Australia’s current long-run average growth rate includes the period of strong

productivity growth following the reforms of the 1980s and 1990s. We should not

take for granted that this experience will be repeated, particularly in the absence of a

reinvigorated structural reform effort.

If history is any guide, it is almost certain that any economy will experience business

cycles and shocks over a 40 year time horizon.

When downturns strike the first sign is flagging demand and weakening sales.

Capacity utilisation falls as businesses produce less, employ fewer people and delay

investment plans. This produces downward pressure on prices and wages growth.

Governments tend to collect less in taxes and pay out more in benefits (the so called

automatic stabiliser effects), and the result is a deterioration in the budget balance.

As the budget position is weaker, and this is typically sustained over several years,

this flows through to higher debt levels.

While the economy will recover to its trend real GDP path and full employment over

the long run, the pre-downturn trajectory of nominal GDP may never be fully attained

if there are long-lasting impacts on domestic prices. There may also be long-lasting

changes to the budget position, in particular the level of debt.


Page 35

Chart 1.25 highlights the persistent and significant impacts that the recessions of the

1980s and 1990s had on Government budgets. In the early 1990s the underlying

cash balance moved from a surplus of 1.5 per cent of GDP to a deficit of

4.1 per cent of GDP. Net debt rose from 4.0 per cent of GDP to a peak of

18.1 per cent of GDP. As the chart highlights, deterioration in the deficit due to a

recession tends to be swift, while repair of the budget is more protracted and

requires sustained spending discipline.

Chart 1.25 Underlying cash balance and output gap

-6

-4

-2

0

2

4

-6

-4

-2

0

2

4

1978-79 1983-84 1988-89 1993-94 1998-99 2003-04 2008-09 2013-14

Per cent of GDPPer cent of GDP

Underlying cash balance Output gap Source: ABS Cat. No. 5206.0 and Treasury

1.5 Managing the environment

There are many pressures affecting our environment, particularly water and land

resources, which may impact the environmental endowment that we leave future

generations. The environmental changes that unfold over the next 40 years will affect

Australians’ quality of life across a range of dimensions. Over-used, damaged or

depleted resources could reduce Australians’ well-being and the ability of future

generations to rely on the environment for economic activity.

Achieving strong economic growth and strong environmental outcomes are

complementary objectives. Policies that create strong economic growth and a

sustainable budget will mean that government is better placed to invest in

environmental protection. More broadly, domestic and international experience shows

that as real per capita incomes rise people are more willing not only to devote more

resources to environmental improvement, but actually a growing share of their higher

incomes.


Page 36

Conversely, protecting the environment can also contribute to economic growth,

particularly in certain sectors. For example, an improved environment can boost

opportunities for tourism, while appropriate and sustainable management of fisheries

can enhance the long-term health of the fishing industry.

The Government has structured its environmental management under four key pillars

— clean water, clean land, clean air and heritage protection — to improve the quality of

Australia’s environment for future generations.

Clean water

Water is and will continue to be a vital resource in Australia. Australia is one of the

driest continents on earth and has large natural variations in inland water flows.

Historically, high levels of water extraction from our rivers have compounded the

effects of natural variations in water flows and made water management an

increasingly important part of environmental policy.

The pressure on Australia’s water resources has been most acutely felt in southern

Australia, where measures show that water quality has declined as flow declined.

Northern Australian and Tasmanian inland water environments, on the other hand,

have faced water pressures because of substantial water extraction in specific areas

for hydro-electric power.

With regard to water management policy, significant agreement has been reached to

address past over-allocation of water resources. The Murray Darling Basin Plan

provides an essential framework for managing water use across the Murray Darling

Basin in Queensland, NSW, Victoria, South Australia and the ACT for future

generations. The Murray Darling Basin Plan provides greater certainty to businesses

and communities and aims to achieve a balance between economic, environmental

and social considerations. For these benefits to be achieved, it will be important that

the Murray Darling Basin Plan withstands the test of time, including future droughts.

Future generations will benefit from actions taken now to ensure that our water

resources are maintained and well managed. This includes ensuring human activity

does not result in damage to, or overuse of, our water systems or harm the productive

capacity of our resources.

A significant challenge over coming decades will be the protection of the Great Barrier

Reef. The Great Barrier Reef supports nearly 70,000 jobs and is worth $5.6 billion a

year to the economy.5 While it remains the best managed marine ecosystem in the

world, it is facing threats, including from climate change. A growing population with

rising per capita incomes, as well as expanding tourist numbers, will require careful

policy management to support economic development in the region whilst minimising

5 Great Barrier Reef Outlook Report 2014.


Page 37

the environmental impact. Recent initiatives in this space include ending the disposal

of capital dredge material for ports in the marine park: five major projects for disposal

in the park have been cut to nil and this has been further backed by regulation to ban

future disposal in the marine park.

Water quality in the World Heritage Area is improving as a result of a partnership

between farmers and governments to reduce the amount of fertilisers, chemicals and

sediments running off farming land. This has seen a 28 per cent reduction in

pesticides, 11 per cent reduction in sediment and 16 per cent reduction in dissolved

inorganic nitrogen.6 Improved water quality is one of the most effective ways to

improve the Reef’s resilience, including against climate change.

The Australian Government is committed to making strong decisions in managing the

Great Barrier Reef and, along with Queensland, is investing $2 billion for its protection

over the next decade.

The Australian and Queensland governments’ comprehensive strategic assessment of

the Great Barrier Reef World Heritage Area and adjacent coastal zone was the most

complex and comprehensive analysis of and blueprint for environmental management

arrangements ever undertaken in Australia. The Reef 2050 Long-Term Sustainability

Plan builds on that work. The Plan has been developed in partnership with

stakeholders including environmental representatives, the tourism industry and the

fishing industry.

Clean land

It is important that Australia employs effective land management policies to ensure the

preservation and improvement of this essential natural resource.

Australia is a continent of significant land mass with climatic zones which vary

considerably. Our land resources are used for a range of purposes including livestock

grazing, agriculture, forestry, urban development and nature conservation. Past

practices from these various uses have had significant impacts on Australia’s land

resources. For example, pastoral and agricultural land use has sometimes degraded

soil structure and water infiltration, and depleted soils of carbon and nutrients.

Whilst there have been improvements in land management in Australia in recent

decades, more can and is being done to ensure that the productive capacity of pastoral

and agricultural land is maintained for future generations and that protected areas

effectively conserve Australia’s unique biodiversity (Box 1.5).

6 Great Barrier Reef Report Card 2012 and 2013 — detailed results, Australian and Queensland governments.


Page 38

Box 1.5: Biodiversity and land management

A major biodiversity initiative is the Government’s appointment of Australia’s first

Threatened Species Commissioner. The Commissioner is tasked with bringing a

national focus to conservation efforts for Australia’s endangered native flora and

fauna and developing a plan of priority actions to prevent extinctions and halt the

decline of Australia’s most threatened species. Efforts will be supported by the

Government’s $30 million investment in a new Threatened Species Recovery

research hub, under the National Environmental Science Programme (NESP).

On the land, programs with investments of more than $2 billion are being rolled out

to engage individuals and communities in work on the ground, exploiting the local

knowledge and commitment of those who know their land best.

A key component is a single National Landcare Programme committed to supporting

action in natural resource management. This Programme is based on three

important values: simple, local and long-term.

Through the National Landcare Programme the Government funds actions to tackle

weed and feral animal threats, restore and link habitat, manage fire regimes and

protect wildlife.

Working alongside the National Landcare Programme is the Government’s Green

Army, which is funded to support environmental improvements each year such as

revegetation, weed removal and habitat restoration. The Green Army will be a

significant environmental resource to deploy across the country and is already

making significant and lasting improvements to our environment.

As Australia’s population grows, careful land management planning and strategies will

be required to mitigate the risk of biodiversity loss. Greater links between conservation

and protected areas, national parks and private lands could provide corridors through

which native flora and fauna can travel in response to changing habitats.

Close cooperation between federal, state and local governments will also be essential.

The introduction of One Stop Shops for environmental approvals will see the start of a

new era of cooperation between states and the Australian Government on

environmental regulation. Responsibilities for environmental regulation will be

consolidated and roles for respective parties will be clearer. This will help ensure that

issues do not fall through gaps between the Australian Government and state systems

and that high environmental standards are maintained while delivering a more efficient

system which will also provide for enhanced monitoring of environmental outcomes

over the longer term.


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Clean air

The Government’s Clean Air Plan incorporates strategies both to address climate

change and to reduce air pollution. The strategies to address climate change are

discussed further in Section 1.5.4, below. The second focus of the Government’s

Clean Air pillar is the objective of achieving a National Clean Air Agreement.

Particulate and ozone pollution continue to be a concern and increasing urbanisation

and population growth will only add to these problems.

A National Clean Air Agreement will lay the groundwork for improvements in Australia’s

air quality and for responding to emerging air quality issues over the coming decades.

The Government has secured the agreement of all states and territories to work

towards a National Clean Air Agreement by mid-2016.

Heritage protection and Antarctica

Australia is acknowledged internationally as a leader in heritage protection but more

can be done to ensure our historic, natural and indigenous heritage is well-managed

and conserved for future generations.

Australia has been a leader in the exploration and conservation of Antarctica for more

than a century and asserts sovereignty over 42 per cent of the Antarctic continent. To

strengthen and support our role in the region over the coming decades, the

Government has released an independent 20-Year Australian Antarctic Strategic Plan.

This Plan critically assesses Australia’s national and environmental interests in

Antarctica and the Southern Ocean and makes recommendations on how Australia

can remain a leading Antarctic nation.

The Government has already taken several steps to secure our future engagement

with Antarctica. These include: budgeting for and undertaking the procurement of a

new world-class icebreaker, to replace the ‘Aurora Australis’, which will serve the

country for the next three decades; and investing $87 million in Tasmania under the

Government’s Economic Growth Plan for Tasmania to build on its status as a leading

gateway city to east Antarctica. Specific measures include investing further in science

to develop a greater knowledge of the impacts of climate change on Antarctica and the

Southern Ocean.

1.5.3 Budgetary implications

The Commonwealth’s budget is impacted by the environment and climate.

Commonwealth Government spending on environment protection is allocated to

protection and conservation of the environment, water and waste management,

pollution abatement and environmental research. The budget also has other spending


Page 40

programs and taxation arrangements that are affected by the environment and climate

(for example, drought relief programs).

This intergenerational report focuses primarily on government expenses that are

affected by demographic change. The level of Commonwealth Government spending

on the environment is not directly linked with demographic factors. Commonwealth

environment programs do not vary automatically with population changes. This differs

to other expenses, such as transfer payments, health and aged care, where

demographic change more directly affects the level of government spending.

Nevertheless, there are costs associated with changes in the environment and climate.

The Government is already making significant investments to mitigate the impact of

climate change including the $2.55 billion Emissions Reduction Fund (ERF), along with

major investments to support biodiversity and, in particular, the Great Barrier Reef.

1.5.4 Climate change

Australia will meet its Kyoto target for 2020 and will join with the international

community to establish post 2020 targets with the aim of reducing global greenhouse

gas emissions. The international community has agreed to aim to keep global warming

to a less than 2oC increase above pre-industrial climate levels.

The Government has committed to reducing Australia’s domestic emissions by

5 per cent below 2000 levels by 2020 through its $2.55 billion ERF.

The ERF will provide incentives for cleaning up Australia’s environment through

activities such as revegetation, investing in soil carbon, increasing industrial and

commercial building energy efficiency, cleaning up power stations and capturing gas

from the millions of tonnes of waste deposited in our cities’ landfills each year.

This will reduce Australia’s emissions through direct investment in projects that

improve the environment and increase productivity. By achieving verified domestic

emissions reductions through incentives, the ERF will avoid achieving such reductions

simply by driving domestic production offshore — a process which would cost

Australian jobs for no decrease in global emissions.

The ERF will also achieve other direct environmental and economic benefits, beyond

its role in reducing greenhouse gas emissions. For example, improvements in energy

efficiency can reduce emissions while boosting productivity for a range of businesses.

The Government will also introduce a safeguards mechanism to complement the ERF.

The safeguards mechanism will ensure that emissions reductions paid for by the ERF

are not displaced by a significant rise in emissions elsewhere in the economy.

The ERF and safeguards mechanism align with actions being taken internationally

(Box 1.6).


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Box 1.6: International approaches

There is no one-size-fits-all way to reduce emissions and around the world

governments are choosing approaches that best suit their national circumstances, in

keeping with the Government’s Direct Action approach.

Many of the approaches used in jurisdictions overseas have features in common

with the ERF. These include incentive-based measures that reward positive action

like baseline and credit schemes, and direct purchasing. Energy efficiency,

emissions standards and direct support for investment in better practices and

technologies are other approaches. For example:

• Japan is establishing its Joint Crediting Mechanism to help meet emissions

reduction targets by purchasing direct emissions reductions and funding

low-carbon technology diffusion through bilateral agreements with developing

countries.

• In California, about 16 million offset credits have been issued for emissions

reductions from projects such as the destruction of ozone depleting

substances, under the framework of California’s climate change response

legislation.

Energy efficiency measures are widely used to reduce greenhouse gas emissions.

In the United Kingdom, all new homes built from 2016 will need to have zero

emissions for heating, hot water, cooling and lighting. Under the Korean Target

Management Scheme, around 500 large emitting entities are required to meet

energy efficiency targets. There are energy intensity and efficiency schemes in

countries such as China, India, Indonesia, Japan, New Zealand, Thailand, Turkey

and the United States. New Zealand has an economy-wide energy intensity

improvement target of 1.3 per cent annually to 2016.


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Box 1.7: Summary of the state of the climate 2014

Data and analysis released by the Bureau of Meteorology (BOM) and

Commonwealth Scientific and Industrial Research Organisation (CSIRO) shows that:

• Australia’s climate has warmed by 0.9°C since 1910, and the frequency of

extreme weather has changed.

• Rainfall averaged across Australia has slightly increased since 1900, with the

largest increases in the northwest since 1970.

• Rainfall has declined since 1970 in the southwest. Autumn and early winter

rainfall has mostly been below average in the southeast since 1990.

• Extreme fire weather has increased, and the fire season has lengthened,

across large parts of Australia since the 1970s.

• Global mean temperature has risen by 0.85°C from 1880 to 2012.

Average rainfall in southern Australia is projected to decrease and heavy rainfall is

projected to increase over most parts of Australia.

Research

Governments must continue to plan for the potential economic and environmental

effects of climate change. Some economic effects may be beneficial — where regions

become warmer or wetter this may allow for increased agricultural output — while

others may be harmful. For example, lower rainfall may reduce crop yields, or transport

infrastructure (such as roads, ports and rail networks) may become more susceptible

to damage from extreme weather events.

To inform and support action on this issue, the Government has committed $9 million

over three years to re-fund the National Climate Change Adaptation Research Facility

(NCCARF). NCCARF will provide decision-makers, including state and local

governments, with advice and guidance on assessing and responding to the risks

associated with climate change. Particular emphasis will be placed on responding to

risk in Australia’s coastal zone.

Under the new NESP, more than $23 million over six years has also been allocated to

an Earth Systems research hub to improve our understanding of how the climate

system may change in the future.

This research hub will be led by the CSIRO, in partnership with the BOM and several

Australian universities, and will build on the knowledge and expertise developed under

the National Climate Change Science Programme.


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1.5.5 The way forward

National environmental governance is shared among the three levels of government

(Commonwealth, state and local), households, businesses and the community sector.

There is a role for the Commonwealth in leading and coordinating environmental

policies to drive better environmental management for the generations to come.

In many areas, the Commonwealth is already implementing policies with a long-term

objective. Nonetheless, some environmental challenges and opportunities are not

defined by state or international borders. These challenges will require cooperation

from all levels of Government, business and the community.

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2015 Intergenerational Report: Chapter 1 - How will ... · Men 16.9 18.2 19.3 20.4 21.3 Women 19.3 20.4 21.4 22.3 23.1 Note: Cohort life expectancy at a given age takes into account